Three regulatory publications for Christmas…but no gold, frankincense or myrrh for securitisation.

Following the publications by the European Banking Authority of their report to the Commission regarding the definition of high quality liquid assets and by the Basel Committee of its new consultation on the capital weightings for bank holdings of securitisation, EIOPA published on December 19th its report on capital requirements for insurance companies under Solvency II. This last document (to be found here) represents a very mixed result for securitisation. On the one hand, following a request from the European Commission to revisit it original proposals, EIOPA has sought – in the new document – to define a category of “high quality securitisation”. This is the first attempt to perform this vital step to reach a logical and fair regulatory outcome. Broadly speaking, PCS approves of the resultant definition. However, the capital requirement numbers that EIOPA then proposes for this new category are very high indeed. High enough to kill any real possibility of insurance companies purchasing any securitisations. This, in turn, will have a devastating effect on the attempts to rebalance the European financial architecture toward a greater capital market component. It is also, in our view, the result of a flawed methodology that unfairly penalises high quality securitisations against other asset classes and does not treat “like-for-like”. With the EBA and Basel Committee reports not focusing on any definition of high quality securitisation and using the same flawed methodology, this trilogy of proposals omens very poorly for the hopes of a revival of securitisation as a funding channel. Those who have a stake in such a revival, whether as lenders, borrowers and anyone interested in the future of finance in Europe now have their work cut out for them for 2014.